During the past weeks, the Federal Reserve has confirmed that employment must improve before changing current monetary policy. Under these conditions, the US dollar should depreciate further and the EUR/USD could challenge 1.38 over the short term.
US: It is not time to give up
The optimism of Mr. Bernanke at the beginning of 2013, which was interpreted as an imminent change in monetary policy, has been replaced by a more realistic view of the state of the US economy. In fact, during the last few months, growth did not show any signs of improvement, while the unemployment rate stayed above the Federal Reserve’s standards. In addition, in October, retail sales numbers were almost unchanged from previous months. Consumer spending declined even though the household saving rate fell from an average of 5.6% of disposable income from 2010 to 2011 to 5.0% in 2012. Wages were not supportive and increased 3.3% in 2012 versus 4.0% from 2010 to 2011.
Unemployment still on target
At the same time, employment does not seem to be gaining momentum. The hiring rate is slow, and the number of people leaving the workforce remains high. Despite cash surpluses, US companies are still prudent in hiring new workers. In effect, demand has remained volatile even after a promising beginning of the year. Furthermore, the national ISM declined three points between October and November, and new orders fell more than 7 points in November 2013. The year-on-year rate of growth of existing home sales declined from 16.4% in July to 5.2% in October. This slump was probably due to the increase of long-term interest rates that started last spring.
World banks are battling deflation
Central banks around the world should keep current accommodative bias unchanged for a few more months. Battling deflation is now a priority. Japan has demonstrated that it is very difficult to recover from a long period of lower prices. The ECB’s recent decision to cut rates follows in that direction. The Fed, on the contrary, holds the same objective, but through the reduction of unemployment. Both continents will pursue their goals until growth rises to or above the long-term average. In the meantime, the US dollar could depreciate further until the US reduces its huge debt and increases interest rates. The EUR/USD could challenge 1.38 short-term and, eventually, 1.46. The long-term bullish cycle for the euro that started in 2000 is still in place. Historically, however, the tendency has shown to uptrend for about 20% from the lows before correcting.
Angelo Airaghi, www.ProfitsOn.com
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